'I'm not worried - India and China will stay strong': Why investors should not panic over falls in emerging market funds

These are nervous times for investors in emerging market funds. Fears that many developing economies will be unable to sustain their growth have caused fund values to fall by more than 10 per cent over the past three months.

As these markets feel the heat, should investors pull out, sit tight, or see it as an opportunity to buy at depressed prices? Johanna Gornitzki reports.

Chinese economy: Three years ago, annual growth in China was above 10 per cent, while now it is 7.5 per cent

What are emerging markets?

More than 20 countries are recognised by the World Bank as emerging economies – from China and Brazil to the Czech Republic and South Africa.
What they all have in common is that they carry political, economic and currency risks greater than in developed markets such as the US and Europe. But while dangers are many, there is potential for greater growth and profits.

Investing in some of the fastest-growing economies became particularly popular in the wake of the 2008 financial downturn in the developed world, when emerging markets remained in rude health.

How much money is invested?

Investors have about £18billion invested in global emerging markets funds, according to the Investment Management Association. This is about 4 per cent of the total in investment funds. But more than £1billion was sold by investors in June, as they took fright from market falls.

Why are they in freefall?

One reason is the slowdown in Chinese economic growth. Three years ago, annual growth in China was above 10 per cent. Now it is 7.5 per cent and slowing.
Darius McDermott, managing director of broker Chelsea Financial Services, says: ‘The slowdown has not only affected the Chinese economy, but also other emerging economies such as Brazil, which is a big exporter to China.’

The strengthening of the dollar has also hit performance. McDermott says: ‘For the past decade, the dollar was very weak and emerging markets did well. Generally, when the dollar is weak, emerging markets do well and vice versa.’

Signs that the US Federal Reserve will start winding down its quantitative easing programme have caused emerging markets to wobble. A reduction in this money-printing programme is a sign that the US is well on the road to recovery and that interest rate rises will follow.

This has led investors to switch to Western markets.
Countries with deficits such as Indonesia and India have been under most pressure. The average emerging markets fund has lost 2 per cent over the past year. In comparison, the average global fund has achieved 17 per cent.

What is likely to happen in the next 12 months?

Investment advisers are pessimistic. McDermott says: ‘I would expect emerging markets to continue to underperform developed markets for the next 12 months.’

What should investors do?

Adrian Lowcock, investment fund analyst at discount broker Hargreaves Lansdown, says: ‘Investors should stay calm. Volatility is a common trait among emerging markets and it is a risk investors should be prepared for.’

McDermott says: ‘For long-term investors who are happy to accept a huge dollop of risk it wouldn’t hurt them to dip a toe into emerging markets. Current low valuations give investors a much better chance to make a gain in the long term.’ But instead of committing a lump sum, investors should consider drip-feeding money in monthly to spread risk.

Over the past three years, fund returns are 22 per cent and 3 per cent, respectively.
For investors keen on a specific emerging market, Brian Dennehy of Fundexpert.co.uk recommends Jupiter India – despite the alarming slide in the country’s currency, the rupee. Investors have seen their holdings slide in value by 27 per cent in six months.

He says: ‘India is attractive for long-term investors due to compelling demographics and the potential for strong economic growth from an extremely low base.

‘Nearly half of the Indian population is under the age of 24 and a young population often drives future economic growth as they acquire an appetite for consumer goods.’

I’m not worried – India and China will stay strong

Growing assets: Ross and Rebecca Keeping with Seth, aged 1

Software manager Ross Keeping is remaining calm despite seeing some of his emerging market fund holdings fall sharply in value.
Ross, 34, has 10 per cent of his tax-friendly Individual Savings Account in Fidelity China Focus and Fidelity India Focus. Over the past six months, these funds have sunk in value by 3 per cent and 22 per cent, respectively.

Manchester-based Ross, who lives with wife, Rebecca, 31, a speech therapist, and their one-year-old son, Seth, says: ‘I’m not really concerned about recent market turbulence, as I’m looking to remain invested for at least the next 20 years. I see my Isa as a retirement fund and I am hoping any short-term losses now will have long been recouped by the time I put my feet up.’

Ross says he will continue to invest in the two Fidelity funds monthly, hoping to build up his holding while prices are close to rock bottom, and he believes India and China will remain engines of world growth.